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Fitch Affirms Longfor at 'BBB-'; Outlook Stable
January 6, 2017 / 3:02 AM / a year ago

Fitch Affirms Longfor at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, January 05 (Fitch) Fitch Ratings has affirmed Longfor Properties Co. Ltd.'s (Longfor) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed Longfor's foreign-currency senior unsecured rating and its outstanding senior unsecured notes at 'BBB-'. A full list of rating actions can be found at the end of this commentary. China-based Longfor's ratings are supported by its established homebuilding operations, which have been generating healthy cash flow that the company has used to expand its investment property (IP) business. The IP business likely generated around CNY2bn in rental revenue in 2016 (2015: CNY1.5bn). KEY RATING DRIVERS Established, Diversified Homebuilder: Longfor has built a defensive business covering over 20 Tier 1 and 2 cities in China. In 1H16, around 31.5% of its 32 million square metres (sq m) of attributable land bank was in western China, where Longfor is a leading player, with a strong brand name in key cities such as Chongqing and Chengdu. Longfor's expansion outside western China has reduced contracted sales from the region to 20% of the total in 1H16 from 41% in 2013. Early Mover in Land Replenishment: Longfor added land in cities such as Beijing, Shanghai, Hangzhou, Nanjing and Suzhou in 2015, before prices ran up in 2016. This head start in land replenishment is likely to support contracted sales growth for the next two years and improve its profitability. These cities, which accounted for 49% of the gross floor area (GFA) Longfor acquired in 2015, made up 49% of its 1H16 contracted sales and 29% of its GFA sold. In addition, Longfor replenished land in Beijing and Hangzhou in 1H16, but not in Shanghai, Nanjing or Suzhou, as land prices in these cities had risen rapidly. Longfor is focused on acquiring land in cities with lagging growth, such as Jinan and Qingdao, which accounted for around 47% of Longfor's total GFA acquired in 1H16. Quality IP Portfolio: Fitch expects Longfor to continue to expand its IP portfolio in 2017-2019. Longfor's urban retail malls in prime locations in Chongqing, Chengdu, Beijing and Hangzhou made up over 80% of Longfor's IP portfolio, with the rest made up of community malls that are part of its large residential projects. Fitch estimates the GFA of Longfor's retail malls increased by CAGR of over 41% to 1.9 million sq m over 2016-2011, and we expect this to increase to 2.5 million-2.7 million sq m by 2017-2018. Its IP revenue increased to around CNY2.0bn in 2016 from only CNY0.4bn in 2011. Longfor has maintained a high occupancy rate of over 95% for past four years in spite of the expansion, and we forecast the occupancy rate at 93% over 2017-2019. Positive Homebuilding Cash Flow: Fitch expects Longfor to continue to generate positive cash flow from operations (CFO) in 2017, following total CFO of CNY20bn between 2012 and 2015. The continued positive CFO will support the gradual expansion of its homebuilding and IP businesses. Longfor typically adds two to three new malls a year for its IP business. Healthy Financials: We expect Longfor's business profile to continue strengthening, with contracted sales of over CNY85bn in 2016 compared with CNY54bn in 2014 and 2015, and recurring rental revenue growing 40% to around CNY2bn in 2016. Fitch expects Longfor's leverage, as measured by net debt to adjusted inventory (including IP valued at higher of cost or 5% yield), to remain healthy. We estimate leverage will stabilise at around 32% in 2016, while its total contracted sales to total debt should increase to around 1.4x in 2016. Access to Low-Cost Funding: Longfor has access to diversified funding sources and has strong access to both domestic and offshore bonds and banks markets. Its interest costs fell to around 5.18% annualised in 1H16 from 6.7% in 2012 after the company refinanced its offshore debt, which also extended the offshore debt's average maturity. Fitch expects Longfor's interest costs to remain low, with management's focus on maintaining ample liquidity and ready access to various funding channels helping to support its ratings. Constrained by IP Expansion: Longfor's rental revenue for 2016, which we estimate to be close to CNY2.0bn, was still insufficient to cover its cash investments in IP of CNY3bn-5bn. This was, however, an improvement from 2014, when its rental income was CNY876m and its cash investments in IP was CNY3.8bn. Its IP business contributed to less than 15% of its total EBITDA, leaving the company reliant on its homebuilding operation to support its IP expansion. The small scale of its IP portfolio also does not yet generate cash flow to cover the expansion, resulting in negative free cash flow. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: -Investment property income reaches CNY2.5bn-3.0bn in 2017-2018 -Contracted sales by GFA to decrease by 0%-6% over 2017-2019 -Average selling price for contracted sales to increase by 2% for 2017-2019 -EBITDA margin of around 22%-23% in 2017-2019 RATING SENSITIVITIES Negative: Future developments that may individually or collectively, lead to negative rating action include: - Net debt/adjusted inventory (investment property valued at higher of cost or 5% yield) sustained above 40% - Contracted sales/total debt sustained below 1.0x - EBITDA margin sustained below 22% - Sustained weakening of cash flow from operations Positive: Future developments that may individually or collectively, lead to positive rating action include: -Net debt/adjusted inventory (investment property valued at higher of cost or 5% yield) sustained below 30% -The company's investment property operation stabilises at a larger scale and generates substantially higher recurring income. FULL LIST OF RATING ACTIONS Longfor Properties Co. Ltd. -Long-Term IDR affirmed at 'BBB-'; Outlook Stable -Senior unsecured rating affirmed at 'BBB-' -Rating on CNY2bn 6.750% senior unsecured notes due 2018 affirmed at 'BBB-' -Rating on USD500m 6.750% senior unsecured notes due 2023 affirmed at 'BBB-' Contact: Primary Analyst Vanessa Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. 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